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Potential Changes Looming With How Student Loan Debt is Handled During Bankruptcy

Advocates are currently urging the United States Supreme Court to provide clarification about what debtors must establish to eliminate student loan debt in bankruptcy. Erasing student loan debt through bankruptcy is almost always difficult to do. Bankruptcy courts require a high standard of “undue hardship” to be established before student loan debt can be discharged. 

While bankruptcy law is supposed to be uniform, courts have interpreted the undue hardship 

standard in conflicting ways. While the Supreme Court could rule on the matter, Congress might act first. The National Consumer Bankruptcy Rights Center as well as the National Association of Consumer Bankruptcy Attorneys have argued that this inconsistency with student loan debt weakens how courts process bankruptcy cases. 

What the Brunner Test Means

Many courts assess what constitutes undue hardship by relying on the Second Circuit’s decision in Brunner v. New York State Higher Education Corporation. Courts, however, have interpreted this decision in various ways.

Under the Brunner test, undue hardship requires debtors to establish that repaying a loan would make a minimal standard of living impossible, that the inability to pay on the student loans is likely to continue, and that good faith efforts have been made to repay the loan.

At the time that the Second Circuit decided Brunner, the law only required debtors to establish an undue hardship if they were interested in discharging student loans earlier than five years when repayment was due. Congress then increased the waiting period to seven years before eliminating it. 

Courts gradually added various criteria to Brunner. Other courts rejected Brunner. 

The Recent Second Circuit Case

In 2021, the Second Circuit ruled in the Tingling case. The court in the case considered either reasserting a higher burden for student loan cancellation or loosening standards. Ultimately, the Second Circuit chose to affirm the high burden to discharge student loans in bankruptcy. While this decision is not binding on other circuit courts, the Second Circuit is suggesting to other courts that Brunner is an appropriate test. 

Notable Student Loan Bankruptcy Cases

Over the last few years, there have been several highly publicized student loan cancellation cases, which include the following:

  • A Navy veteran discharged $220,000 of student loan debt. The New York court that decided this case ruled that requiring the veteran to repay his student loan debt would impose an undue hardship on him.
  • A medical school graduate had approximately 99% of his student loans canceled through student loans discharged in bankruptcy. The California court, in this case, permitted the graduate to discharge his debt because he could not secure employment as a medical resident. 

Congress v. Courts

The Fifth Circuit has argued that Congress rather than courts should revise the student loan debt standard. Some signs suggest, however, that Congress might act soon. Senator Elizabeth Warren is expected to introduce a consumer bankruptcy reform bill that would permit student loans to be discharged on terms equal to many other types of debt. The Senate is also drafting a resolution that would request President Joe Biden to take executive action to cancel $50,000 of student loan debt for each qualifying borrower. 

In March 2021, Senator Warren even held a conference addressing student loans. Senator Warren argued that the discharge of student debt in bankruptcy should exist for “extreme cases” because sometimes people have a large amount of student loan debt because they are $200,000 in debt. Warren currently chairs the Subcommittee on Economic Policy at the Senate Committee on Banking, Housing, and Urban Affairs where she has been an outspoken advocate that bankruptcy reform should address broader forgiveness of student loan debt. Senator Warren has also argued that the complex student loan repayment and servicing methods will not provide an ideal solution to borrowers.

A recent survey conducted by CNN of the 500 Congressional members and involving 66 individuals who responded found out:

  • 10 Congressional members do not support overarching student loan forgiveness 
  • Nine members did not address whether they support forgiving student loan debt
  • One individual supports student loan forgiveness but not a plan connected to an “arbitrary” amount
  • 37 individuals support measures forgiving up to $50,000 in student loan debt
  • Six individuals support forgiveness of up to $10,000
  • 27 individuals took out student loans
  • Five individuals are still paying off loans

What Lies Ahead for Student Loan Debt

President Biden might potentially not cancel student loans. After all, despite the lobbying from progressives to enact up to $50,000 of student loan forgiveness, President Biden might decide not to cancel student loan debt. President Biden might also not be able to pass student loan cancellation by unilateral executive order. If President Biden does not forgive student loan debt, three situations are likely to occur:

  • Even if President Biden does not cancel student loan debt, Congress might still cancel student loan debt. Democrats in Congress have rallied around a proposal from Senate majority leaders to cancel up to $50,000 of student loans. This proposal, however, only applies to federal student loans and only for student loan borrowers who earn less than $125,000 a year. This proposal, however, almost certainly will not become law because there are not a sufficient number of votes in Congress.
  • If neither President Biden nor Congress cancels student loans, there are still options that can be utilized to help borrowers. Congress might revise the bankruptcy code so student loan cancellation in bankruptcy is more easily achieved. 
  • Congress might simplify student loan repayment. Four income-driven repayment plans currently exist including Income-Based Repayment, Pay As You Earn, Revised Pay As You Earn, and Income-Contingent Repayment. These repayment plans base your monthly payment on your discretionary income and permit borrowers to receive federal student loan forgiveness on the remaining balance after 20 years for undergraduate student loans and 25 years for graduate student loans. 

Speak with an Experienced Bankruptcy Attorney

If you need the assistance of an experienced bankruptcy attorney, contact attorney Melanie Tavare today to schedule a free case evaluation.

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